The present invention relates to methods and apparatus for conducting transactions. More particularly, embodiments of the present invention relate to methods and apparatus for conducting transactions involving mandatory units.
Mandatory units are hybrid financial products involving the issuance of a stock purchase contract together with a debt instrument. These products were first introduced in the mid to late-1990's, and have become popular products providing benefits to both issuers and investors. Mandatory units provide a number of benefits to both the company issuing the unit as well as investors in the mandatory units. They may be used by issuers to implement more efficient financings that have desirable financial benefits that may not be achieved by straight debt or equity issuances.
Examples of hybrid products that provide desirable financial benefits to both issuers and investors include the hybrid described in our co-pending, commonly assigned, U.S. patent application Ser. No. 10/707,491, as well as the “ACES” mandatory units offered by the assignee of the present invention. A wide variety of other mandatory units are provided by other entities.
Many of these hybrids provide desirable financial benefits, including desirable tax treatment, when appropriately structured. In the U.S., for example, the Internal Revenue Service (“IRS”) has confirmed in its Revenue Ruling 2003-97 that the interest on the debt portion of a mandatory unit is deductible if the purchase contract portion of the unit terminates in bankruptcy and if, on the issue date of the unit, it is substantially certain that a remarketing of the debt portion will succeed (it is not substantially certain if the reset rate is capped). That is, an issuer will enjoy interest deductions if the unit is structured such that the reset rate is not capped.
Unfortunately, this is at odds with regulatory requirements imposed on certain types of entities, limiting their ability to issue mandatory units. For example, in many countries, certain types of financial institutions must comply with rules and regulations imposing capital adequacy standards. In the U.S., for example, most financial institutions must comply with the Bank Holding Company Act of 1956 (12 U.S.C. §1841 et seq.). The capital adequacy standards required by the Bank Holding Company Act are generally implemented by rules promulgated (or enforced) by the U.S. Federal Reserve which has adopted risk-based capital measures used to assess the capital adequacy of regulated banking organizations. Similar risk-based capital measures are used in other countries.
These capital measures generally group capital into several categories: (1) “Tier 1” or “core” capital; and (2) “Tier 2” or “supplementary” capital. The capital measures generally require that the Tier 1 component of an institution's qualifying capital represent at least 50% of the institution's total capital, and generally includes freely available equity of the institution such as common stockholder equity, preferred stock and interests in the equity accounts of consolidated subsidiaries.
The capital measures generally require that the Tier 2 component may represent up to 100% of the Tier 1 component, and may include a number of different types of capital, such as allowances for loan and lease losses, perpetual preferred stock and related surplus, hybrid capital instruments, perpetual debt, and mandatory convertible debt securities. That is, hybrid instruments such as mandatory convertible debt securities, are considered Tier 2 capital. Regulated institutions also may need to comply with certain adequacy ratios that specify the relative amounts of Tier 1 and Tier 2 capital the institution can maintain at any given time. In general, regulated institutions prefer to increase the amount of Tier 1 capital. One reason that mandatory units are considered Tier 2 capital is that they typically have uncapped reset rates (pursuant to the IRS rules discussed above).